The wye is installed in the right direction. There is no restriction in it though (no tiny hole in the barb portion) - the barb is for a 3/4" hose, which I've used a barb fitting to attach to the 5/8" heater hose.

My thought is that the wye fiting is drawing too much hot water from the engine block before it is up to temp. This means that the hot water that has left the block to go to the heater is being replaced with cold water from the impeller faster than the engine can warm up.

Sounds like restricting the return line that ties into the wye fitting is what needs to be done?

yeah, but your theory seems wrong because the thermostat should not be open to circulate cold water past it, no matter how fast the water in the heater is circulating. Unless it's creating such forceful suction that the heater hose is pulling a ton of water past the thermostat bypass?

Unless it's creating such forceful suction that the heater hose is pulling a ton of water past the thermostat bypass?

In thinking this must be the case. And not really the thermostat bypass as mush as it is the wye allowing for a lot of suction that is just draining the block of hot water and the impeller is filling up the block with cold water

Does anyone know if the actual Heater Craft Wye has a smaller inside diameter on the 5/8" barb (IE restricted to 1/4")?

The solution is to add a restriction to the return hose that goes into the Mercury wye fitting. I added a ball valve to adjust the amount of restriction to get it just right. Apparently the Heater Craft part has a 1/8" restriction in the 5/8" barb.

Hot water was dumping through the heater and into the raw water intake too fast, therefore being replaced with cold water from the impeller causing the block to run cold.